International Financial Reporting and Analysis
Week 5: Hand-In Assignment—Attachment
For the assignment this week, you are provided with two sets of financial statements and then asked to undertake financial analysis on the data. You are also required to calculate earnings per share, both basic and diluted. Finally, you should interpret the measures that you have calculated and provide comments regarding the financial performance of the organisation.
You will find an income statement, statement of financial position, and notes to the financial statements for a fictional company attached below. Each statement shows figures for the past 3 years. After reviewing the financial statements, complete the questions below.
Links to a Word Document
Required:
Complete a ratio analysis on the attached financial statements for each year provided. Compute the following ratios: operating return on equity, financial leverage multiplier, return on capital employed, asset turnover, net profit margin, current ratio, and gearing ratio.
Compute both the basic and diluted earnings per share for each year provided.
Include the above calculations in a business report, providing a detailed analysis of profitability, liquidity, solvency, and asset utilisation of the organisation from the information that you have calculated. What details can you glean from this analysis? What trends do you see? What additional information may be needed to provide a clearer picture?
Income Statement for the year to 31 January
2010
2009
2008
£’000
£’000
£’000
Total revenue
405,607
378,799
348,650
Cost of sales
306,158
286,515
264,152
Gross profit
99,449
92,284
84,498
Selling general and administrative expenses
76,651
70,500
65,001
Earnings before interest and taxes
22,798
21,784
19,497
Interest expense
2,199
2,103
1,849
Income before tax
20,599
19,681
17,648
Income tax expense
7,199
6,950
6,364
Net income
13,400
12,731
11,284
Basic weighted ordinary shares
10,500
11,000
12,000
Diluted weighted ordinary shares
11,000
11,675
12,300
Statement of financial position
as of 31 January
2010
2009
2008
£’000
£’000
£’000
Assets
Current assets
Inventories
37,769
38,362
36,375
Receivables
3,905
3,654
2,840
Cash and cash equivalents
7,275
5,569
7,373
Total current assets
48,949
47,585
46,588
Non-current assets
Land
25,600
25,400
19,000
Buildings
78,000
77,800
75,000
Plant and equipment
24,000
23,500
21,000
Accumulated depreciation
(13,120)
(10,771)
(10,395)
Total non-current assets
114,480
115,929
104,605
Total assets
163,429
163,514
151,193
Liabilities
Current liabilities
Accounts payable
47,721
46,500
43,471
Tax payable
7,669
11954
8,283
Total current liabilities
55,390
58,454
51,754
Long term debt
36,740
35,335
32895
Provisions
6,014
5,117
4,971
Total long-term liabilities
42,754
40,452
37,866
Total liabilities
98,144
98,906
89,620
Stockholders’ equity
Ordinary shares
47,945
48,030
48,070
Retained earnings
17,340
16,578
13,503
Total stockholder equity
65,285
64,608
61,573
Summary of Significant Accounting Policies
General
The company operates three retail stores throughout the United Kingdom and is committed to providing individuals with high-quality products and value to customers. We have fostered a culture that retains devoted and well-trained employees who provide optimal service. Our accounting year ends on 31 January.
Cash and Cash Equivalents
The company considers investments with a maturity of 3 months or less when purchased to be cash equivalents. The company receives a majority of its payments due from banks for third-party credit card, debit card, and electronic benefit transactions (EBT) processed. These transactions normally complete within 24–48 hours and are thus considered cash equivalents.
Receivables
Accounts receivable consist primarily of receivables from suppliers for marketing or incentive programs. Additionally, amounts due from banks for customer credit card, debit card, and EBT transactions that take in excess of 7 days to process are classified as accounts receivable.
Inventories
Inventories are valued at the lower of cost or net realisable value using the retail method. This is computed on the basis of selling price less the appropriate trading margin. All inventories are finished goods.
Non-current Assets
Non-current assets are stated at cost, and management reviews these assets for signs of impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying amount is determined to not be recoverable, potential impairment is based on fair market value.
Cost of Sales
Cost of sales includes all actual product costs and costs of transportation.
Operating, Selling, General, and Administrative Expenses
Operating, selling, general, and administrative expenses include all operating costs of the company except those costs related to the transportation of products from the supplier to the retail stores.
Depreciation
Depreciation for financial statement purposes are provided on the straight-line method over the estimated useful lives of the various assets.
Legal Proceedings
The company is not involved with any current litigation.
Provisions
The company has designated an estimated amount for possible future shop closures and redundancy costs.
Dividends
The company declared and paid the following dividend amounts in each year to 31 January:
2010 2009 2008
£’000 £’000 £’000
Dividends 12,638 9,656 9,500
Retained Earnings 762 3,075 1,784
Beginning Retained Earnings 16,578 13,503 11,719
Ending Retained Earnings 17,340 16,578 13,503
Changes in Ordinary Shares
The company has been undergoing a systematic buyback of ordinary shares in an effort to increase the value of shares, while also reducing the threat of takeover.
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